MIXT - Karooooo Ltd. Increases Focus On Cartrack Division In Asia

2023-11-03 15:23:26 ET

Summary

• Karooooo Ltd. reported top-line revenue and operating income growth in its FQ2 2024 financial results.
• The company offers telematics services and a used car trading platform.
• Management's focus on Southeast Asia may take time to generate results due to the slow recovery in China, potentially negatively affecting the region.
• I remain on Hold for Karooooo Ltd. but with an eye to improved revenue growth prospects ahead.

A Quick Take On Karooooo

Karooooo Ltd. ( KARO ) reported its FQ2 2024 financial results on October 11, 2023, producing revenue growth of 21.1% year-over-year and increasing operating income.

The firm provides a range of telematics services and a used car trading platform.

I previously wrote about KARO with a Hold outlook on tapering revenue growth prospects from its South Africa business operations.

Its focus on Southeast Asia may take time to bear fruit as the region feels the ill effects of a slow recovery in China.

For the near term, I remain on Hold for KARO, but with an eye on a revenue growth trajectory improvement, which may lead to an upside opportunity in 2024.

Karooooo Overview And Market

Singapore-based Karooooo provides a SaaS platform for enterprises seeking to have constant communication and data analytics, i.e., telematics, for their vehicles and other assets.

The company also operates a used car trading platform for buyers and sellers in South Africa. It recently stopped holding inventory for this segment and now only operates the platform connecting buyers and sellers.

Karo is led by founder and CEO Isaias Jose Calisto, who was previously a member of Vehicle Tracking Services, a vehicle telematics distributor.

The firm's primary offerings include:

• Communications

• Analytics

• Accounting

• Live video streaming

• Workforce management

• Medical and roadside assistance

• Used car trading platform

• Logistics services.

According to a 2019 market research report by Allied Market Research, the global market for automotive telematics was an estimated $50.4 billion in 2018 and is expected to reach nearly $321 billion by 2026.

This represents a forecast CAGR of 26.8% from 2019 to 2026.

The primary reasons for this expected growth are advances in solution options for organizations and the demand for increased transportation efficiencies.

The chart below shows the expected growth pattern by segment within the larger vehicle telematics market:

Major competitive or other industry participants include:

• Verizon Connect

• WebFleet

• Trimble

• Masternaut

• Fleet Complete

• Tracker

• Netstar

• MiX Telematics

• CTrack Inseego.

Karooooo’s Recent Financial Trends

Total revenue by quarter (blue columns) has continued to rise; Operating income by quarter (red line) has turned up in the most recent quarter:

Gross profit margin by quarter (green line) has trended lower in recent quarters; Selling and G&A expenses as a percentage of total revenue by quarter (amber line) have fluctuated within a narrow range:

Earnings per share (Diluted) have moved up in FQ2 2024, as the chart shows here:

(All data in the above charts is GAAP.)

In the past 12 months, KARO’s stock price has risen 3.05% vs. that of MiX Telematics’ ( MIXT ) fall of 41.75%, with a strong divergence between the two stocks after the May earnings results announcements:

For balance sheet results, the firm ended the quarter with $34.5 million in cash and equivalents and $2.9 million in total debt, of which $0.5 million was categorized as the current portion due within 12 months.

Valuation And Other Metrics For Karooooo

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:

Based on the DCF, the firm’s shares would be valued at approximately $25.92 versus the current price of $24.00, indicating they are potentially currently slightly undervalued at its present rate of revenue growth and expected earnings in fiscal 2025.

KARO’s most recent unadjusted Rule of 40 calculation was a strong 48.2% as of FQ2 2024’s results, so the firm’s performance has dropped materially from FQ4 2023, per the table below:

(Source - Seeking Alpha.)

Sentiment Analysis

The chart below shows the frequency of various keywords in management’s most recent conference call with analysts:

The chart indicates the firm continues to experience headwinds in some of its operating markets due to varying macroeconomic pressures.

Analysts asked leadership about the closure of its Carzuka used car trading operation, its Cartrack operations and financials.

Management replied that its used car trading operation windup would eliminate losses there, but may temporarily hurt Cartrack margins as employees are being transitioned to Cartrack.

Catrack will be focused on increasing subscriber growth in South Africa and Southeast Asia as a result.

Leadership expects Cartrack to retain stable average revenue per user [ARPU] and to rely on economies of scale for growth in subscribers and profitability.

Commentary On Karooooo

In its last earnings call (Source - Seeking Alpha ), covering FQ2 2024’s results, management’s prepared remarks highlighted the demand for the firm’s platform from customers seeking "digitalization, ESG and compliance" solutions.

Management spoke about the strengths from the firm’s decentralized culture, which prizes employees who are entrepreneurial and customer-centric.

Total revenue for FQ2 2024 rose by 9.8% year-over-year, while gross profit margin dropped by 2.6% as employees are moved from Carzuka to Cartrack.

Management didn’t disclose any customer or revenue retention rate metrics.

Selling and G&A expenses as a percentage of revenue fell by 1.2% YoY, and operating income increased by 3.1%.

The company's financial position is strong, with ample cash and little debt, although we don’t have the most recent cash flow figures as of FQ2 2024.

Previously, in FQ4 2023, free cash flow was an impressive $61.3 million.

KARO’s Rule of 40 performance has been excellent, although it has dropped somewhat from its FQ4 2023 performance.

Looking ahead, consensus revenue estimates for fiscal 2024 suggest an expected growth rate of only 3.5%.

If achieved, this would represent a drop in revenue growth rate versus FY 2023’s growth rate of 11.34% over FY 2022.

In the past twelve months, the firm's EV/EBITDA valuation multiple has risen by about 12% net, as the chart from Seeking Alpha shows below:

A potential upside catalyst to the stock could include growth in its Cartrack segment due to management’s reduced distraction from Carzuka.

My discounted cash flow calculation suggests the stock may be slightly undervalued at its current price of around $24.00.

However, its focus on Southeast Asia as a prime regional target may have some cost in the near term as China’s slow growth weighs on the region.

Also, management will need to show an uptick in revenue growth to reignite the stock, in my opinion.

So, for the near term, I’m Neutral on KARO, but with an eye on a revenue growth trajectory improvement, which may lead to an upside opportunity in 2024.

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